TransCanada Corp's options for Keystone XL and what they're worth

TransCanada Corp. is reviewing its options in light of U.S. President Barack Obama's decision to reject its proposal to build the Keystone XL pipeline, but investors shouldn't expect a write down of unrecoverable project costs just yet

TransCanada Corp. is reviewing its options in light of U.S. President Barack Obama’s decision to reject its proposal to build the Keystone XL pipeline, but investors shouldn’t expect a writedown of unrecoverable project costs just yet.

The company could pursue court challenges or reapply for a presidential permit when a new administration is in the White House in 2017.

If the project eventually loses commercial support and is halted, TD Securities analyst Linda Ezergailis believes TransCanada could sue the U.S. government to recoup project costs under the North American Free Trade Agreement (NATFA).

If and when a writedown does happen, she noted that as much as half of the project costs could be recouped by repurposing components for other projects or reselling them. Ezergailis estimates that would reduce the value of a writedown to roughly US$2.25 per share.

That compares to a ballpark forecast of $8.50 for what the project could be worth on an undiscounted future value basis.

The analyst considers the reasonable odds that the project eventually gets built in some form and name is 50 per cent, noting that despite its solid commercial underpinnings, uncertainty surrounding both energy fundamentals and political dynamics should persist for the next decade or so.

“In our view, Keystone XL’s challenges should increase the Canadian political and commercial support for Energy East and other existing large-diameter crude oil export pipelines out of western Canada,” Ezergailis told clients, reiterating a buy rating and $59 price target on TransCanada shares.

That target implies there will be no project cost writedown within the next year.

TransCanada had invested US$2.4 billion into Keystone XL as of the end of September 2015.